Indian economic recovery impresses Fitch which changes outlook to stable

• Fitch Ratings has revised its outlook on India’s sovereign rating to ‘stable’ from ‘negative’.
• It, however, has cut India’s growth forecast for this year to 7.8% due to inflationary impact of the global commodity price.
• The agency also highlighted that India’s gross domestic product (GDP) recovered by 8.7% in FY22.

Fitch Ratings has revised its outlook on India’s sovereign rating to ‘stable’ from ‘negative’.

The rapid economic recovery in India made credit rating agency Fitch revise its outlook on India from negative to stable. The report released today also said that weakness in the financial sector is easing — which aided their outlook revision notwithstanding near-term headwinds from the global commodity price shock.

It, however, has cut India’s growth forecast for this year to 7.8% due to inflationary impact of the global commodity price. Previously, the agency predicted the growth of 8.5% for the fiscal year 2023.

High nominal GDP growth facilitated a near-term reduction in the debt-to-GDP ratio. But the agency said that public finances remain a credit weakness with the debt ratio broadly stabilizing, based on its expectation of persistent large deficits.

“The rating also balances India's external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators,” Fitch said.

The agency also highlighted that India’s gross domestic product (GDP) — monetary value of final goods and services produced in a country — recovered by 8.7% in FY22, which shows that the country has witnessed a strong recovery from the shocks of Covid-19.

Near term growth will be decent, but challenges remain

Fitch Ratings expects India’s economy to grow at the rate of 7% between FY24 and FY27, facilitated by the government’s push for better infrastructure, agenda reformation and reducing pressure on the financial services sector.

“India's strong medium-term growth outlook relative to peers is a key supporting factor for the rating and will sustain a gradual improvement in credit metrics,” the report added.

However, it also cautioned against the uneven nature of economic recovery and implementation risks for infrastructure spending as well as reforms.

Financial sector has been improving

Fitch added that the financial sector was a key growth impediment before the pandemic but the situation has been improving. The sector should facilitate better credit allocation and investment in the medium term.

“Banks' capital sufficiency will be important in determining their ability to provide more credit, even as regulatory forbearance has given them time to rebuild capital buffers. Potential asset-quality deterioration from the pandemic shock appear manageable, but there are risks as forbearance measures unwind amid heightened global macroeconomic uncertainty,” Fitch said.

Fiscal deficit to narrow down

The report forecasts that India’s fiscal deficit could narrow down from 10.7% of the GDP in FY22 to 10.5% of the GDP in FY23. Eventually, Fitch expects India’s fiscal deficit to reduce to 8.9% of the GDP in the next three years, but with challenges.

“High interest payments/revenue of 26% of GDP in FY22 ('BBB' median: 7%) constrains fiscal flexibility, particularly in the context of rising sovereign bond yields. We forecast the aggregate state deficit to gradually return to its pre-pandemic norm of 3.0% of GDP over the next several years from 3.8% in FY22,” the report said.

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